Leading chipmaker Broadcom Corporation (BCRM) reported solid results for the third quarter of 2010, which beat both management and the Zacks estimates.
Broadcom generated revenues of $1.806 billion in the third quarter of 2010, up 44% year over year and up 12.6% sequentially. The results surpassed management’s revenue guidance of $1.7 – $1.8 billion and the Zacks Consensus Estimate of $1.749 billion.
The sequential growth in the quarter was propelled by strength in Mobile and Wireless and Broadband businesses, which were up 27% and 6%, respectively.
In terms of end-markets, the Broadband Communications segment recorded a 6% sequential growth, driven by record sales of core set-top boxes and broadband modems.
Cable operators in China are adding voice and data services to their existing video platforms, along with a nationwide push to increase high-definition (HD) broadcasting resulting in a significant increase in orders for HD set-top boxes and cable modem chip sets.
The Broadband Access business saw strong sequential growth driven by increased VDSL (Very high bit-rate Digital Line Subscriber) deployments and customer premises equipment (CPE) shipments for IPTV deployments globally. In the Consumer Electronics business, Blu-ray experienced strong sequential growth driven by upcoming holiday shipments. However, an industry-wide slowdown in the LCD TV sales resulted in weaker-than-expected revenue of DTV system-on-a-chip (SoC) solutions.
The Mobile & Wireless segment registered a 27% sequential growth, driven primarily by the strength in the wireless combo chips, GPS and cellular-based band solutions. In particular, growth in wireless LAN and GPS businesses was tremendous as wireless LAN revenue grew above 20% and GPS sales more than doubled on a sequential basis.
Broadcom’s Bluetooth products are available in leading video game consoles, digital televisions and remote controls. Broadcom continues to push its Bluetooth technology into the consumer electronics experience.
Revenues from the Infrastructure and Networking segment were slightly up on a sequential basis and up 35% year over year driven by record sales of switches. Broadcom continues to see strength in its switching portfolio from new product adoption and service provider broadband network upgrades and rollouts. The company also announced initial 40-nanometer product shipments with 64-port, 10-gig Trident chip and expects additional 40-nanometer products to begin shipment in this quarter.
On a product basis, product revenue grew 46% year over year and 13% sequentially to $1.7 billion. Income from the Qualcomm (QCOM) agreement came in at $51.6 million. License revenues declined, coming in at $5.7 million, down 27.3% year over year.
Margins: Gross margin improved to 51.7% from 50.9% in the year-ago quarter but was down from 52.6% in the previous quarter. Product gross margin improved to 50.1% from 48.5% in the year-ago quarter but declined from 50.8% in the previous quarter. The sequential decline was primarily due to excess and obsolete reserves taken in the quarter.
Broadcom posted a net income of $327.1 million or 60 cents per share compared to a net income of $278 million or 52 cents in the second quarter and a net income of $84.6 million or 16 cents in the year-ago quarter. The reported figure easily beat the Zacks Consensus Estimate of 56 cents.
Balance Sheet: During the quarter, Broadcom generated $455.7 million of cash from operations, up from $236 million at the end of the year-ago quarter and $196 million at the end of the previous quarter, driven by solid growth in net income. Consequently, cash and equivalents increased by $0.3 million to $2.4 billion.
Inventory turns improved to 6.5x, up from 6.2x in the second quarter but were still below management’s target due to timing mismatches and the new product ramp of select cellular base band and mobile multimedia products.
Guidance: Going forward, Broadcom expects net revenue in the fourth quarter to be flat to up $100 million sequentially to $1.8 billion – $1.9 billion, much better than the Zacks Consenus Estimate of $1.0 billion.
Broadcom continues to invest in the DTV business and sampled its first 40-nanometer DTV part to multiple customers with production shipments expected by year-end. Broadcom expects revenue growth to continue in the December quarter, driven by new product cycles and increases in the adoption of high-definition pay TV services and content across the globe.
Based on customers’ order plans and solid traction and new product ramps, Broadcom expects healthy growth in the fourth quarter from its Wireless Connectivity business and a substantial increase in sales from cellular solutions (Apple’s ipad in particular). Revenues from wireless connectivity devices are projected to grow phenomenally driven by strong demand for smartphones, tablets, netbooks and digital TVs.
End-market-wise, Broadcom expects the Broadband segment to record modest growth sequentially in the fourth quarter. Mobile and Wireless segment is expected to be up on a sequential basis but revenues from Infrastructure Networking should be roughly flat.
Product gross margin is expected to remain roughly flat on a sequential basis. The guidance does not include the impact of acquisitions of Beceem and Percello, which are expected to close by 4Q10 –1Q11.
The strong results and better-than-expected guidance should lead to noteworthy estimate revisions for the fourth quarter from the analysts covering the stock. Investors were clearly impressed with Broadcom’s performance leading to a significant surge in share price. Shares of Broadcom were up 11.50% and closed at $41.50 in after-hours trading. In regular trading, shares were down 0.77% and closed at $37.22.
Concurrent with the earnings release, Broadcom announced that it will acquire Percello Ltd., a privately-held company that develops system-on-a-chip (SoC) solutions for femtocells, for $86 million. Femtocells are small, low power cellular base stations that extend coverage indoors where signals are weak.
Broadcom will also shell out $12 million more in cash for future payment to the former holders of Percello capital stock and other rights upon satisfaction of certain performance goals. The acquisition is expected to be approximately neutral to earnings per share in 2011.
Broadcom also plans to offer $600 million of Senior Notes for general corporate purposes. As of September 30, 2010, the company did not have any debt.
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